on Page 303 of Schweser - Study Session 4 from reading number 14.
Number 16, the answer is B – WHY?
Let’s go back to the problem:
Contract FX2001 is a 90 day forward contract initiated 60 days ago. The contract calls for purchase of CHF 200 million at an all in rate of USD 0.9832
If it says the contract was initiated 60 days ago, so that means the investor purchased a 90 day forward 30 days ago. am i right here? It explicitly says that a 90 day contract was initiated 60 days ago.So with this, I would expect to use a locked in rate next to "90 day forward"
The explanation uses the 30 day forward.
and what i dont get is why are we discounting the difference? Don’t we want to get the value TODAY not 30 days ago?
Nope. The 90-day contract was initiated 60 days ago, not 30; there are 30 days left. Today’s 14/04/09, they entered into the forward contract on 14/02/08, and it expires on 14/05/09.
Because there are 30 days left till expiration, we would undo this transaction with a 30-day forward contract (to sell CHF). The exchange rate on that 30-day contract as well as the exchange rate on the initial 90-day contract (which has 30 days left) are for delivery in 30 days; if we want to know the value today we have to discount the difference back to today. I’d encourage you to draw a timeline with the initiation of the original forward contract, its expiration, today’s date, and today’s 30-day forward contract. It might make things easier to unravel.